Aparna Mathur and Mark J. Perry: Modern economy doesn't need unions

Labor Day is celebrated to recognize the important contributions that U.S. workers make to the economic prosperity of America. But at the same time, it provides an opportunity to reflect on the declining relevance of organized labor to the success of our workers.

A century ago, unions played an important role in the labor movement by boosting workers’ wages, improving working conditions and giving workers a voice in the workplace. Unions were relevant then because organized labor provided a platform by which workers could better negotiate these issues with employers. But unions are increasingly unable to address the challenges that workers face in the 21st century.

When manufacturing employment started to decline in the late 1970s, due primarily to technological advances and automation and to a lesser degree globalization, workers did not flock to unions to shield them against these changes. In fact, union membership started to decline concurrently with the decline in manufacturing employment. In 1983, 16.8 percent of workers were part of a private-sector union — today that share has shrunk to an all-time low of only 6.4 percent. Over that period, manufacturing employment declined from 18 million to only about 12 million factory workers today.

While unions cannot be blamed for the job losses that have occurred due to technological advances and offshoring, in many ways unions made matters worse for companies facing those changing global forces. Typically, union wage premiums arise because unions negotiate compensation packages that are artificially above market compensation levels. For firms facing global competition, unions raise their employers’ labor costs and make them less competitive. This hastened the outsourcing of production overseas to take advantage of lower manufacturing labor costs in other countries.

Therefore, it’s important to recognize the hidden costs of union wage premiums. In the short run, unionized workers enjoy compensation packages that are above market levels. But in the long run, those wages reduce the profitability of their employers, and investment in the global economy will move away from companies with such high costs and low profitability.

For example, the Detroit automakers have consistently lost market share to foreign-based automakers in the United States, including Toyota, Volkswagen and Nissan. While the Big Three (GM, Ford and Chrysler) once had a 90 percent market share of U.S. vehicle sales in the 1960s, their market share slipped below 50 percent about a decade ago, and it now stands at only 45 percent.

There’s no question that union wages along with burdensome union work rules contributed to the decline of the Big Three’s competitiveness and those automakers’ shrinking market share.

The shift away from organized labor is also apparent in the adoption of right-to-work laws in states across the country. Today, more than half of U.S. states (28) have passed these laws that affirm the right of Americans to work without being forced to join a union. Research suggests that companies are much more likely to set up production in states with these laws.

Foreign automakers like Toyota, Nissan, Volkswagen, BMW and Mercedes have almost exclusively located their U.S. plants in right-to-work states like Alabama, Mississippi, Georgia, Texas and Tennessee to take advantage of the greater flexibility in labor costs and work rules.

Understandably, business-friendly right-to-work states attract more investment and create more jobs. For example, a recent analysis of Bureau of Labor Statistics data from 2006 to 2016 revealed that overall employment grew by 8.1 percent in the states with right-to-work laws on the books in 2006 compared to employment growth of only 3.5 percent in compulsory union states.

The decline in unions also reflects the shift toward service-sector work. According to BLS projections, the 30 fastest growing occupations between 2014 and 2024 will be in the service economy — in professional, technical, medical and managerial fields that increasingly employ workers like web developers, computer technicians, physical therapists, nurse practitioners and financial advisers.

A one-size-fits-all union-type compensation contract with pay determined mostly by seniority and not merit is no longer desirable or relevant for the workers of the 21st century. America’s workers today are increasingly competing in a highly globalized economy and labor market, and they are no longer are best served by union representation that ignores individual effort and merit-based compensation.

The verdict is clear. In today’s high-tech, service and knowledge-based global economy, collective bargaining and unions don’t make sense as they once did in the manufacturing-based economy of the 1960s. For workers to rise up to the challenge of performing today’s jobs and to enjoy wage gains, investing in skills training and education is a far better path forward than paying union dues to be represented by outdated organizations that will become increasingly irrelevant in the workplaces of the future.

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Mathur and Perry are resident scholars in Economic Policy Studies at The American Enterprise Institute, and Perry is a professor of economics at the Flint campus of The University of Michigan. They wrote this for InsideSources.com